of whether or not an LBO may be considered to be a form of insider trading, and, if so, how it may be perceived in this way. Second, the economic effects of LBOs are examined. In this context, the effects on the overall economy both posi tive and negative of LBOs are identified.
4M. I. Weinstein, "A Curmudgeon's View of Junk Bonds," Journal of Portfolio Management (Spring 1987): 76.
6M. Hirschey, and J. K. Zaima, "Insider Trading, Ownership Structure, and the Market Assessment of Corporate Sell Offs," Journal of Finance, 44 (September 1989): 971.
7M. R. Garfinkel, "The Causes and Consequences of Lever aged Buyouts," Federal Reserve Bank of St. Louis Review, 71 (September October 1989): 25.
Diversification has long been recognized as a desirable goal for both firms and investors.8 Diversification is viewed as a viable means of reducing risk in a variety of contexts.9 A cursory consideration of diversification attained through corporate acquisition and merger activity, therefore, would tend to lead one to a conclusion that such a result could only be beneficial for the economy as a whole, as well as for indivi dual firms, investors, and consumers. A perusal of the matter, however, brings to light some contentions which lead to less sanguine conclusions.10 More specifically, the contentions implicate acquisitions and mergers accomplished through LBOs in undesirable economic outcomes. It is desirable, therefore, to examine the problem with a view toward answering such charges one way or the other.
Regardless of the strategic goals involved, merger and acquisition activity usually results in some degree of corpor ate diversification. This result was particularly
8R. I. Robinson, and D. Wrightsman, Financial Markets: The Accumulation and Allocation of Wealth, 5th ed. (New York: McGraw Hill Book Company, 1990), 106.
9R. Brealey, and S. Myers, Principles of Corporate Finance, 3rd ed. (New York: McGraw Hi...